Where do we start with the Federal Reserve? Well, let’s start with the name, first of all the Federal Reserve is not federal, it is not a governmental body nor has it ever been, the government have never owned one share of stock in the Fed, the public have never owned any stock, the only people who have ever owned stock in the Fed are the owners of private commercial banks, the two biggest holders of stock presently are Citibank and JP Morgan Chase company, thus the Fed is a privately owned central bank that has stockholders to whom it pays dividends, it is actually a private corporation, it is so private that its stock is not even traded on the stock exchange. If one has any doubt whether the Federal Reserve is a part of the U.S. government, check a local US telephone book, it’s not listed in the blue “government pages” it is correctly listed in the “business” white pages, right next to Federal Express, another private company.
Another interesting thing about the name…the Fed holds no reserves, at least not in the way you or I think as reserves, they have altered the meaning of the word “Reserves” from one that implies money kept in a safe to pay claimants, to merely accounting entries at various Federal Reserve Banks which in turn allow commercial banks to make many times those sums in loans, thus reserve accounts kept at the Federal Reserve Bank are just a system for keeping track of how much credit commercial banks create. No gold or silver or any commodity is provided as collateral to Federal Reserve Notes, the only thing which acts as reserves to Fed notes is the full ‘faith and credit’ of the United States government. The Fed can never run out of reserves because it creates its base reserves, ie the base currency, which commercial banks then use to expand credit through fractional reserve lending, out of nothing. This sounds like an unbelievable statement, however senior employees of the Fed have publicly confirmed this fact, one of note was Marriner Eccles, Governor of the Federal Reserve Board, who in hearings before the House Committee on Banking and Currency in 1941 was asked by Senator Wright Patman how the Federal Reserve got the money to buy government bonds.
“We created it,” Eccles replied.
“Out of what?” asked Patman
“Out of the right to issue credit money.”
“And there is nothing behind it, is there, except our government’s credit?”
“That is what our money system is,” Eccles replied. “If there were no debts in our money system, there wouldn’t be any money.”
The Federal Reserve System will never add anything to the capital structure of America, or to the formation of capital, because it is organized to only produce credit, it produces more and more credit (or debt, depending on which side of the fence you are standing) so the private commercial banking owners of the Fed can make more and more profit from earning the interest off this ever expanding credit, that is the true purpose of the Fed, to ensure the money supply constantly expands, so the interest earned off this money also increases, this is interpreted publically as the Fed helping the economy by ‘controlling inflation’, what this actually means is that the Fed ensures that inflation grows at a steady but not very noticeable rate (at least not to consumers), this way their owners get the increased profits year on year that they demand and the public perceives the Fed in a positive light as they believe their purpose is to guide and help the economy grow for the benefit of all.
In 1923, Representative Charles A. Lindbergh, a Republican from Minnesota, the father of famed aviator, “Lucky” Lindy, put it this way:
“The financial system … has been turned over to the Federal Reserve Board. That board administers the finance system by authority of … a purely profiteering group. The system is private, conducted for the sole purpose of obtaining the greatest possible profits from the use of other people’s money.”
Robert H. Hemphill who was Credit Manager at the Federal Reserve Bank in Atlanta for many years summarized the absurdity of the Federal Reserve system in 1934:
“We are completely dependent on the commercial banks. Someone as to borrow every dollar we have in circulation, cash, or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It [the banking problem] is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects are remedied very soon.”
Rep. Louis T. McFadden who rose from office boy to become cashier and then President of the First National Bank in Canton Ohio, worked for 12 years as Chairman of the Committee on Banking and Currency, making him one of the foremost financial authorities in America, the following are portions of Rep. McFadden’s speech, quoted from the Congressional Record:
“About the Federal Reserve banks, Rep. McFadden said, “They are private credit monopolies which prey upon the people of the United States for the benefit of themselves and their foreign customers; foreign and domestic speculators and swindlers; the rich and predatory money lenders. This is an era of economic misery and for the reasons that caused that misery, the Federal Reserve Board and the Federal Reserve banks are fully liable.”
Congress and the IRS do not have access to the financial records of the Fed. Every year Congress introduces legislation to audit the Fed, and every year it is defeated, it is shielded from audits and congressional oversight. As former senator and presidential contender Barry Goldwater pointed out, ‘The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and manipulates the credit of the United States.’”
Today, when the government runs a deficit, the Fed prints dollars through the U.S. Treasury, they buy the debt and the dollars are circulated into the economy. In 1992, taxpayers paid the FED banking system $286 billion in interest on debt the FED purchased by printing money virtually cost free, forty percent of American federal income taxes goes to pay this interest.
Who owns the Fed?
The law does not permit the stock of a Federal Reserve Bank to be traded publicly like the stock of a typical corporation, the original Federal Reserve Act called for each regional bank to sell stock to raise at least $4 million to begin operations, the stock was to be sold only to banks, not to the public. Only in the event that sales to member banks did not raise the necessary $4 million would the regional Fed Banks be permitted to sell shares to the public, however, all banks raised the requisite amount of capital. No stock in any Federal Reserve Bank has ever been sold to the public, to foreigners, or to any non-bank U.S. firm (Woodward, 1996). Investment banks, not commercial banks, are ineligible to own any shares of a Federal Reserve Bank.
Eustace Mullins conducted extensive research on stock ownership of the Fed when he was on the staff of the Library of Congress in the early 50′s, the research at the Library of Congress was directed and reviewed daily by George Stimpson, founder of the National Press Club in Washington, whom The New York Times on September 28, 1952 called, “A highly regarded reference source in the capitol. Government officials, Congressmen, and reporters went to him for information on any subject.”
Published in 1952 by Kasper and Horton, New York, Mullins’ original book on the Federal Reserve was the first nationally-circulated revelation of the secret meetings of the international bankers at Jekyll Island, in that book Mullins named the following institutions as the primary Fed stockholders:
Rothschild Bank of London
Warburg Bank of Hamburg
Rothschild Bank of Berlin
Lehman Brothers of New York
Lazard Brothers of Paris
Israel Moses Seif Banks of Italy
Goldman, Sachs of New York
Warburg Bank of Amsterdam
Chase Manhattan Bank of New York
And that the following banks were holding this stock on behalf of the owners:
National City Bank, New York (Kuhn & Loeb)
First National Bank ( JP Morgan)
National Bank of Commerce, New York
Hanover National Bank, New York
Chase National Bank, New York
The individuals listed below also owned banks which in turn owned large holdings of shares in the Fed:
James Stillman Mary W. Harnman A.D. Jiullard
Jacob Schiff Thomas F. Ryan Paul Warburg
William Rockefeller Levi P. Morton M.T. Pyne
George F. Baker Percy Pyne Mrs. G.F. St. George
J.W. Sterling K. St. George H.P. Davidson
Mullins has the original organization certificates of the twelve Federal Reserve Banks, giving the ownership of shares by the national banks in each district. The Federal Reserve Bank of New York issued 203,053 shares, and, as filed with the Comptroller of the Currency May 19, 1914, the large New York City banks took more than half of the outstanding shares. The Rockefeller, Kuhn & Loeb controlled National City Bank took the largest number of shares of any bank, 30,000 shares. J.P. Morgan’s First National Bank took 15,000 shares. When these two banks merged in 1955, they owned in one block almost one fourth of the shares in the Federal Reserve Bank of New York, which controls the entire system, National Bank of Commerce of New York City took 21,000 shares. Not only did the Morgan-Kuhn & Loeb alliance purchase the dominant control of stock in the Federal Reserve Bank of New York, with almost half of the shares owned by the five New York banks under their control, First National Bank, National City Bank, National Bank of Commerce, Chase National Bank and Hanover National Bank, but they also persuaded President Woodrow Wilson to appoint one of the Jekyll Island group, Paul Warburg, to the Federal Reserve Board of Governors. Since the money-center banks of New York owned the largest portion of stock in the New York Fed, they hand-picked its board of directors and president.
While it appears that American banks have always held the stock of the Fed on its books, the real owners of this stock were, and still are, the European banking houses of Europe, even the official American owners of stock on the above list were all subservient to the centres of control in London. In 1983 Mullins again reported that the top 8 stockholders of the New York Fed were:
• Chase Manhatten Bank
• Morgan Guaranty Trust
• Chemical Bank
• Manufacturers Hanover Trust
• Bankers Trust Company
• National Bank of North America, and
• Bank of New York.
According to Mullins these institutions owned a combined 63% of the New York Fed’s stock, once again these American banks are controlled by European financial institutions. On June 30th 1997 the New York Federal Bank itself reported that its eight largest member banks were:
• Chase Manhatten Bank
• Morgan Guaranty Trust Company
• Fleet Bank
• Bankers Trust
• Bank of New York
• Marine Midland Bank, and
• Summit Bank
“…the increase in the assets of the Federal Reserve banks from 143 million dollars in 1913 to 45 billion dollars in 1949 went directly to the private stockholders of the [federal reserve] banks.” - Eustace Mullins
Who physically owns the majority of the stock in the Federal Reserve system is a murky and complicated subject, even for the keenest of researchers, and in reality it doesn’t even matter who holds the stock, the facts are that inflation ensures that those closest to the credit money printing spigot are the ones who benefit the most from the whole system, these are the JP Morgan, Citibanks and Chase Manhattans of this world, being first in line is nearly as rewarding as printing the money itself. As more and more credit money is issued into the economy, the credit money already circulating is devalued, those farthest away from the money creation are the ones who suffer most — those with the least access to modern financial transactions — the poor and middle class, in other words. In simplest terms, central banks inflate by printing money, the more money they print, the cheaper money becomes, and the less a government’s debt becomes. By cheapening money, the government deprives individual citizens of part of the value of that money, as the value is eroded, the citizen becomes poorer, even if they don’t notice it over the course of their lifetime.
To put the establishment of the Federal Reserve into its proper context, we must first describe the financial and economic landscape of the early 20th century in America, the national banks had repeatedly tried to establish a centralized banking system in the US after the civil war but they met stiff opposition in state banks, who were able to adapt to the times and offered genuine competition to national banks in terms of servicing loans to the public, also the National Bank Act of 1864, which was the determining financial authority of the United States until November 1914, did not permit banks to lend their credit, consequently, the power of all banks to create money was greatly limited. The international commercial banks knew that the only way they could establish a private central bank was to both destroy state banks and gain the ability to create credit on their terms, which meant having the ability to create an infinite amount of credit from nothing, they knew the only way to do this was to legitimize their goals through the political spectrum, a process known as mercantilism, ie. the use of the state to fulfill one’s personal objectives and self-interest, that is to conflate private with public, allowing the individual or small group to obtain clout that would otherwise not be feasible, mercantilism is the realizing of private goals for individuals or small groups through public means. The ultimate goal of the bankers was to create a private, politically approved, centralized banking system with international commercial banks controlling the entire system, the Fed was to be their instrument of use in creating an exponential amount of credit in America, just as the Bank of England was in the UK.
In the late 19th century the two biggest commercial banks in America were JP Morgan and Kuhn & Loeb company, these two banks were primarily concerned with creating and funding cartels in all the major industries in the US, Morgan was the driving force behind western industrial expansion, financing and controlling westbound railroads through voting trusts. In 1879 Cornelius Vanderbilt’s Morgan-financed New York Central Railroad gave preferential shipping rates to John D. Rockefeller’s budding Standard Oil monopoly. Morgan and Kuhn Loeb held a monopoly over the railroads, while banking dynasties Lehman, Goldman Sachs and Lazard joined the Rockefellers in controlling the US industrial base. Rockefeller’s Standard Oil, Andrew Carnegie’s US Steel and Edward Harriman’s railroads were all financed by banker Jacob Schiff at Kuhn & Loeb, Averell Harriman receiving funds from Ernst Cassel (British banker) to acquire Union Pacific Railroad. Thus the Rockefeller family were financially backed by British money in the earliest days of their oil monopoly, they eventually merged with Britain’s Shell Oil and migrated into the banking cartel through CitiBank and Chase Manhattan bank. The Harrimans were also directly backed by the British firm Brown Brothers, the firm of Montagu Norman, the longest serving chairman in the history of the Bank of England, and both companies eventually merged in 1931 to form Brown Brothers Harriman.
The industrial cartels were created through mergers, the first American wave of mergers was in its infancy in 1897 and was being promoted by the bankers, in that year there were sixty-nine industrial mergers, by 1899 there were twelve-hundred. In 1904 John Moody – founder of Moody’s Investor Services – said it was impossible to talk of Rockefeller and Morgan interests as separate. In more recent years Goldman Sachs, the Rockefeller family, and J.P. Morgan interests have merged and consolidated even further, National Bank of Commerce is now Morgan Guaranty Trust Company, Lehman Brothers has merged with Kuhn & Loeb Company and First National Bank has merged with the National City Bank.
But where and how did Morgan and Schiff get this great power to create such a cartelized industrial landscape? The Morgan bank, at times official U.S. banker for the British government, was founded and always based in London, known there as Morgan & Grenfell, with its arms in New York being JP Morgan, Morgan Guaranty and some other institutions. Kuhn & Loeb arose as Jacob Schiff’s enterprise, financially supported and guided by his London partner, Sir Ernst Cassel, personal banker for King Edward VII, the British Round Table, and the Fabian Society. Kuhn & Loeb was later taken over by the London/German Warburg family, the biggest stockholders in IG Farben, the industrial rock on which the Nazi regime was built. Schiff’s sponsor, Sir Ernst Cassel was descended from the famous Hesse-Cassel royal house, one of the richest royal houses in Europe, their income came mainly from the loaning-out of Hessian soldiers to foreign countries, the Hessian troops were used by England in the American Revolution, in fact the colonial armies fought more Hessian soldiers than English, the house of Hesse-Cassel made a lot of money off the American Revolution. Sir Ernst Cassel of Frankfurt later emigrated to England and became personal banker to the Prince of Wales, later King Edward VII, in 1922 Louis Mountbatten, uncle of prince Philip and cousin to the Queen, married the granddaughter of Ernst Cassel.
As well as giving financial support to US companies via commercial banking, European banking houses also supported their American counterparts via investment banking. Investment banking (which will be explained in more detail later in this article) began in the United States around the middle of the 19th century, the mid-1800s were marked by the country’s greatest economic growth, to fund this growth, U.S. companies looked to Europe and U.S. banks became the intermediaries that secured capital from European investors for U.S. companies. Up until World War I, the United States was a debtor nation and U.S. investment bankers had to rely on European investment bankers and investors to share risk and underwrite U.S. Securities. During this period, U.S. investment banks were closely linked to European banks, these connections included J.P. Morgan & Co. and George Peabody & Co. (based in London); Kidder, Peabody & Co. and Barling Brothers (based in London); and Kuhn, Loeb, & Co. and the Warburgs (based in Germany). U.S. investment bankers would often hold seats on the boards of the companies issuing the securities, to supervise operations and make sure dividends were paid. Because the value of the securities they underwrote frequently surpassed their financial limits, investment banks introduced syndication, which involved sharing risk with other investment banks. Further syndication enabled investment banks to establish larger networks to distribute their shares and hence investment banks began to develop closer relationships with each other, thus one can see how a banking cartel was established in investment banking.
In the early 1900s, J. P. Morgan was the most influential investment banker (as well as commercial, this being a time before the introduction of Glass-Steagall, which outlawed financial institutions operating in both investment and commercial banking) in America, he could sell U.S. bonds overseas that the U.S. Department of the Treasury failed to sell and so he led the financing of the railroads, he also raised funds for General Electric and United States Steel. Nevertheless, Morgan’s control and influence helped cause a number of stock panics, including the panic of 1901.
This business relationship between US banks and companies and their British financial backers was actually a very commonly known fact in American society in the late 19th century, this is why several western states wanted to ban all national banks and it was why the populist politician William Jennings Bryan was thrice the Democratic nominee for President from 1896 -1908, the central theme of his anti-imperialist campaign was that America was falling into a trap of “financial servitude to British capital”, unfortunately not enough people listened to the likes of Bryan (and Jefferson, Lincoln, Jackson, McFadden, Lindberg, etc..) and complete servitude to British finance was eventually what transpired with the establishment of the Federal Reserve. So how exactly did the banking cartel establish their monopoly in practical terms? Well they had a plan, and that plan was as follows.
It was a four fold plan of attack, broken down as follows:
– create and promote political policy for the creation of a privately owned central bank, this policy later became known as the Federal Reserve Act, just as important was to sway public opinion to support such an Act, and finally to legitimize the whole process by getting the Act passed by both congress and the senate as smoothly and quickly as possible.
– Work out details of the Federal Reserve Act, how the central bank was to be run, who was to run it, and other necessary details such as the implementation of an Income Tax law to financially support the central bank, these details were decided upon at Jeckyll Island.
– Introduce Trade Acceptances into American system (explained later)
– Replace current gold standard with a modified more flexible one. (to facilitate easier expansion of credit)
Political/Public Reform & Federal Reserve Act
The campaign for a central bank was kicked off by a fateful speech in January 1906 by the powerful Jacob H. Schiff, head of the Wall Street investment bank of Kuhn, Loeb and Co., before the New York Chamber of Commerce. Schiff complained that, in the autumn of 1905, when “the country needed money,” the Treasury, instead of working to expand the money supply, reduced government deposits in the national banks, thereby precipitating a financial crisis. An “elastic currency” for the nation was therefore imperative, and Schiff urged the New York Chamber’s committee on finance to draw up a comprehensive plan for a modern banking system to provide for an elastic currency (Bankers Magazine 1906, pp. 114–15). James Stillman of National City Bank suggested that a new five-man special commission be set up by the New York Chamber to come back with a plan for currency reform, in response, Frank Vanderlip proposed that the five-man commission consist of himself; Schiff; J.P. Morgan; George Baker of the First National Bank of New York, Morgan’s closest and longest associate; and former Secretary of the Treasury Lyman Gage, now president of the Rockefeller-controlled US Trust Company, thus the commission would consist of two Rockefeller men (Vanderlip and Gage), two Morgan men (Morgan and Baker), and one representative from Kuhn & Loeb. The special commission delivered its report to the New York Chamber in October 1906, to eliminate instability and the danger of an inelastic currency, the commission called for the creation of a “central bank of issue under the control of the government.”
The Panic of 1907 was really the turning point in swaying public opinion in favour of a national central bank, in late 1907 the Aldrich-Vreeland Act was passed, a crucial part of this Act which got very little public attention, but was perceptively hailed by the bank reformers, was the establishment of a National Monetary Commission that would investigate the currency question and suggest proposals for comprehensive banking reform, which was now being called for from every side of the political spectrum, the push for a central bank was gaining serious momentum and Senator Nelson Aldrich lost no time setting up the National Monetary Commission (NMC), which was launched in June 1908. The official members were an equal number of senators and representatives, but these were mere window dressing, the real work was done by the copious staff appointed and directed by Aldrich, this was mostly an alliance of Rockefeller, Morgan, and Kuhn & Loeb people, the top two expert posts, advising the commission were both approved by J.P. Morgan and seconded by Jacob Schiff, the most senior advisor was Henry P. Davison, Morgan partner, founder of Morgan’s Bankers’ Trust Company, and vice president of George F. Baker’s First National Bank of New York. The NMC spent a few months touring Europe, meeting with heads of large European banks and central banks, meanwhile the National City Bank’s foreign exchange department was commissioned to write favourable papers on bankers’ acceptances and foreign debt, while Warburg and Bankers’ Trust official Fred Kent wrote publically on the benefits of the European discount market, this was all done to sway public opinion to support a central bank.
After the bank reformers had sufficiently persuaded the public for the need of a new central bank, they set about implementing their plan politically, in 1912/3 the Republicans had the majority in both houses of government and they were committed to the Aldrich Plan, while the Democrats were pushing the Federal Reserve Act, however neither party bothered to inform the public that both bills were nearly identical except for their names, and both bills were based on the banking reform plans written by the Jeckyll Island group. Ultimately, after the election of the Democrat Woodrow Wilson in 1913, the bank reformers decided it more prudent and practical to push through with the Democratic bill and thus the Federal Reserve Act was put before the House (but called the Glass Bill) and the bill was passed on September 18, 1913 by 287 votes to 85. On December 19, 1913, the Senate passed their version by a vote of 54-34, however more than forty important differences in the House and Senate versions remained to be settled, and the opponents of the bill in both houses of Congress were led to believe that many weeks would yet elapse before the Conference bill would be ready for consideration with the christmas holidays approaching, thus the Congressmen prepared to leave Washington for the annual christmas recess, assured that the Conference bill would not be brought up for debate until the following year. Suddenly and unprecedentedly, a carefully prepared Congressional Conference Committee was scheduled during the unlikely hours of 1:30am to 4:30am on Monday December 22, 1913, when most members were sleeping, at this extraordinarily convened committe meeting, 20 to 40 substantial differences in the House and Senate versions were supposedly described, deliberated, debated, reconciled and voted upon in a near miraculous three hours, at 4:30 a.m. a prepared report of this Committee was handed to the printers, as author Anthony C. Sutton noted:
“This miracle of speediness, never equaled before or after in the U.S. Congress, is ominously comparable to the rubber stamp lawmaking of the banana republics.”
Senator Bristow of Kansas, the Republican leader, stated on the Congressional Record, that the Conference Committee had met without notifing them and that Republicans were not present and were given no opportunity to either read or sign the Conference Committee report, the Conference reports were normally read on the Senate floor, the Republicans did not even see the report, some Senators stated on the floor of the Senate that they had no knowledge of the contents of the Bill. On Monday, December 22, 1913, the bill was passed by the House 282-60 and the Senate 43-23. At 6:02 p.m on December 23rd, the very same day the bill was hurried through the House and Senate, President Woodrow Wilson signed the Federal Reserve Act of l913 into law, the New York Times reported on the front page, Monday, December 22, 1913, in headlines:
“With almost unprecedented speed, the conference to adjust the House and Senate differences on the Currency Bill practically completed its labours early this morning.”
Paul Warburg, who for several days in late December had maintained a small office in the Capitol building, directed the successful pre-Christmas campaign to pass the bill.
We will not go into the details of the Jeckyll Island meeting in this article as they have been covered extensively by other people, two in particular are worth reading if you wish to learn more about the particularly sinister details of this meeting in 1910, one is Eustace Mullins in his book about the Fed, the other is G. Edward Griffin in his book ‘Creatures from Jeckyll Island’.
The use of trade acceptances, (which are the currency of international trade) by bankers and corporations in the United States prior to 1915 was practically unknown. The rise of the Federal Reserve System exactly parallels the increase in the use of acceptances in the US, this is not a coincidence, the men who wanted the Federal Reserve System were the men who set up acceptance banks and profited by the use of acceptances. In Europe, commercial paper, and hence bank assets, were two-name notes endorsed by a small group of wealthy acceptance banks, the founders of the Fed needed to implement the same system in America to get full control of the money supply. One of the first official acts of the Fed Board of Governors in 1914 was to grant acceptances a preferentially low rate of discount at Federal Reserve Banks to encourage their use.
A trade acceptance is a draft drawn by the seller of goods on the purchaser and accepted by the purchaser, with a time of expiration stamped upon it. The open-book system, heretofore used entirely by American business people, allowed a discount for cash, the acceptance system discouraged the use of cash, by allowing a discount for credit, the open-book system also allowed much easier terms of payment, with liberal extensions on the debt, the acceptance did not allow this, since it is a short-term credit with the time-date stamped upon it, it is out of the seller’s hands, and in the hands of a bank, usually an acceptance bank, which does not allow any extension of time, thus, the adoption of acceptances by American businessmen during the 1920’s greatly facilitated the domination and swallowing up of small business into huge trusts, this accelerated the financial crash of 1929.
Open-book accounts are a single-name commercial paper, bearing only the name of the debtor, Acceptances are two-name papers, bearing the name of the debtor and the creditor, thus they became commodities to be bought and sold by banks. To the creditor, under the open-book system, the debt is a liability but to the acceptance bank holding an acceptance, the debt is an asset. The men who set up acceptance banks in America, under the leadership of Paul Warburg, secured control of the billions of dollars of credit existing as open accounts on the books of American businessmen. It was no accident that Warburg himself was the principal beneficiary of adopting trade acceptances, Warburg became Chairman of the Board, from its founding in 1920, of the International Acceptance Bank, the world’s largest acceptance bank, as well as director of the Westinghouse Acceptance Bank and of several other acceptance houses, in 1919, Warburg was the chief founder and chairman of the executive committee of the American Acceptance Council. Warburg knew the importance of acceptances to the survival of his private central banking plan and used fear to sway public opinion, note here an excerpt from an article with Warburg in The New York Times on June 14, 1920:
“Unless the Federal Reserve Board puts itself heart and soul behind the untrammeled development of acceptances as a prime investment for banks of the Federal Reserve Banks the future safe and sound development of the system will be jeopardized.” – Paul Warburg, Chairman of the American Acceptance Council
The First World War was a boon to the introduction of trade acceptances, and the volume jumped to four hundred million dollars in 1917, growing through the 1920s to more than a billion dollars a year, which culminated in a high peak just before the Great Depression of 1929-31.
Replace the Gold standard
Simultaneously, the bankers had to replace the gold standard with a gold-exchange standard, the same fateful system imposed upon the world by the British in the 1920s and modified further by the United States after World War II at Bretton Woods. The gold exchange standard establishes a system, in the name of gold, which in reality manages to install coordinated, international, inflationary, paper money. The idea was to replace a genuine gold standard, in which each country (or, domestically, each bank) maintains its reserves in gold, by a pseudo–gold standard in which the central bank of the client country maintains its reserves in some key or base currency, say pounds or dollars, this generated an unstable, inflationary system – all in the name of gold, this system was eventually bound to collapse, as did the gold-exchange standard in the Great Depression and Bretton Woods by the late 1960s. The purpose again was to gain control of the credit supply by replacing a genuine gold standard with one that looked like a similar gold standard but in reality was nothing of the sort, this pseuso-gold reserve system enabled the Fed creators to create additional credit which was only fractionally backed by gold, throughout the 20th century they have intermittenly modified the reserve requirements and today we are at a point where absolutely nothing of value acts as reserves to the currency supply, the fiat dollar is literally not worth the paper it is printed on.
Prior to 1913 – 100% of US currency backed by gold
1913 – 1944 (Bretton Woods) – 40% of US currency backed by gold
1944 – 1971 – 8% of US currency backed by gold
1971 – Present – 0% of US currency backed by gold
Men behind the Plan
Traditional historians credit (no pun intended) the creation of the Fed to Woodrow Wilson and Carter Glass, however the true architects of the passing of the Federal Reserve Act were Paul Warburg (who was also instrumental in writing the original banking reform bill on Jeckyll Island and developing the political strategy for gaining public support for major banking reform in America) and ‘Colonel’ Edward Mandell House.
Paul Warburg was born in Hamburg, Germany on August 10th, 1868. After completing his education, Warburg worked for banks in London and Paris. In 1891, after gaining some banking experience, Warburg began working for the family banking firm of M.M. Warburg & Co. Later, Paul and his brother Felix emmigrated to America in order to expand the family banking empire to the wealthy United States. Both married well, with Paul marrying into the Solomon Loeb family, founders of the investment bank, Kuhn & Loeb Company. Felix married Freda Schiff, daughter of Jacob Schiff who ran Kuhn & Loeb. After the creation of the Federal Reserve in 1913, President Woodrow Wilson appointed Warburg to the first Federal Reserve Board where he served until 1918. After resigning in May of 1918, Warburg returned to his five hundred thousand dollar a year job with Kuhn & Loeb Company, but he continued to determine the policy of the Federal Reserve System, as President of the Federal Advisory Council and as Chairman of the Executive Committee of the American Acceptance Council. From 1921 to 1929, Paul Warburg organized three of the greatest trusts in the United States, the International Acceptance Bank, the largest acceptance bank in the world, Agfa Ansco Film Corporation, with headquarters in Belgium, and I.G. Farben Corporation whose American branch Warburg set up as I.G. Chemical Corporation. Warburg died on January 24, 1932.
Paul Warburg’s family line extends from Anselmo del Banco, a wealthy Venetian family from sometime in the early 1500′s, Anselmo was the most prominent and wealthiest Jewish resident in the city and was granted a charter by the Venetian government to lend money with interest, when the city of Venice ceased being the banking power it once was in the mid 1500s, the family moved to Bologna for a short period and then to Warburg in Germany in the 16th century where they adopted the town name as their new surname, before moving to Altona, near Hamburg in the 17th century. Later, Paul Warburg’s great-grandfather Moses Marcus Warburg (1763 – 1830) and his brother Gerson Warburg (1765 -1826) founded the M.M.Warburg & C banking company in 1798 that is still in existence today, Moses Warburg’s great-great grandson, Siegmund George Warburg founded investment bank S. G. Warburg & Co in London in 1946.
While Paul Warburg was busy with his Federal Reserve plan, his brother Max Warburg was busy in Hamburg helping finance construction of Germany’s new merchant fleet through the HAPAG company. When Hitler came to power in January 1933, Max Warburg was Germany’s most prominent Jewish banker, he headed the most important private banking firm and was a member of the “general council” of the nation’s central bank. In March 1933 he approved Hitler’s decision to name Dr. Hjalmar Schacht as president of the Reichsbank, the document naming Schacht to this post is signed by Chancellor Hitler and President von Hindenburg as well as the eight members of the Reichsbank “general council,” including prominent Jews Mendelssohn, Wassermann and Max Warburg.
The Warburgs were related to the Loebs, owners of Kuhn Loeb bank, who were the intimate banking partners of William Rockefeller. Together with him they had set up the Harriman family in big business, using capital supplied by the British royal family’s personal banker, Sir Ernst Cassell. The Warburgs initially directed I.G. Farben, which was essentially the same entity as Standard Oil of New Jersey.
Edward Mandell House ( 1858-1938)
House grew up in Houston, Texas, his father, Thomas William House, an English immigrant who had made a fortune as a blockade runner during the war between the States, died the third-richest man in the state in 1880, leaving to his children an estate valued at $500,000. The House family had a very strong “London connection”. Originally a Dutch family, “Huis”, their ancestors had lived in England for three hundred years, after which Thomas House settled in Texas, where he made a fortune shipping cotton and other contraband to his British connections, including the Rothschilds, and bringing back supplies for the beleaguered Texans. House played a vital role as campaign strategist for Woodrow Wilson in 1911 and 1912, and he was hugely responsible for getting Wilson first the nomination and then the presidency in 1913. House played an even more important role after Wilson’s election, because the president-elect had little interest in the nuts and bolts of party politics, including the distribution of patronage and the selection of men for cabinet and other high-level positions, he left these decisions largely in House’s hands, when Wilson arrived in office, House was essentially “the unofficial Secretary of State”, as referred to by Rabbi Stephen Wise in his autobiography, ‘Challenging Years.’ House got heavily involved in the politicking that ultimately led to the passage of the Federal Reserve Act, George Sylvester Viereck in ‘The Strangest Friendship in History, Woodrow Wilson and Col. House’ wrote:
“The Schiffs, the Warburgs, the Kahns, the Rockefellers, the Morgans put their faith in House. When the Federal Reserve legislation at last assumed definite shape, House was the intermediary between the White House and the financiers.”
House was the President’s closest advisor for eight years, later he continued his influence in the Franklin D. Roosevelt administration.
“Mr. House is my second personality. He is my independent self. His thoughts and mine are one.” — President Woodrow Wilson quoted by Charles Seymour, The Intimate Papers of Colonel House, Houghton Mifflin, vol. I, pp.114-115
Tools of the Fed
A brief note on monetary policy, which is supposedly used by the Fed to influence economic growth and thus unemployment and inflation rates. When the Fed conducts monetary policy, it measures the current and projected future condition of the economy, it can choose from three of the following policy options:
a.Restrictive, which involves: decreasing the money supply to raise interest rates and to slow economic growth.
b.Neutral, the Fed may be happy with the current and projected outlook or may require more evidence before deciding to act.
c.Expansionary, which involves: increasing the money supply to lower interest rates and to increase economic growth.
Restrictive monetary policy is used by the Fed to deal with situations of either high inflation or an anticipated rise in future inflation, by raising interest rates, the Fed will either reduce or slow the growth of aggregate demand (GDP).
Choosing either option a or c will change the size of the monetary base by either expanding or contracting the money supply, however to control the rate of change of this expansion/contraction, the Fed uses one or more of the following policy tools:
a. Open market operations (described later)
b. Changes in the reserve requirement
c. Changes in the discount rate
The discount rate is the interest rate that the Fed charges banks to borrow directly from the Fed, it is usually changed after the fact of a policy decision involving open market operations. If the Fed is using open market operations to carry out an expansionary monetary policy, it may follow up on changes in the Fed Funds rate (described later) with a change in the discount rate. In this way, changes in the discount rate are used to confirm (to the public) the direction of Fed policy.
To fully understand the policies of monetary expansion & contraction by the Fed, we must first take a look at how currency/credit money is defined by the Fed themselves, there are different definitions of currency used in the Federal Reserve system, simply broken down as M1, M2 and M3. M1 is the narrowest definition of money and includes:
- currency and coins,
- traveler’s checks, and
- checking accounts (demand deposits).
M2 gives a broader definition of currency and comprises
- all components of M1,
- savings and time deposits of less than $100,000
- money market mutual funds held by individuals, and Eurodollars (U.S. dollars that are deposited in European banks).
M3 is M2 plus dollars held outside the US and deposits larger than $100,000, when the Federal Reserve temporarily increases bank reserves through open market operations, this money is included in M3 but not in M2, the primary difference between M3 and M2 is that M3 includes what the “big boys” are doing. The Federal Reserve still publishes reports of M1 and M2, however they stopped publishing M3 reports in March 2006, the official reason the Federal Reserve gave for ceasing to publish M3 was that it was too difficult to gather the information, however this reason is sheer nonsense, the real reason they stopped publishing the value of M3 was because it was growing a lot faster than M2 at the time, an indicator that long term inflation would increase, the Fed could not afford for the market to see this obvious signal of future rising inflation.
What do the values of M1, M2 and M3 mean in a practical sense? The U.S. Mint reported in September 2004 that circulating coins came to a total monetary value of $993 million, or just under $1 billion, at the same time the Fed reported that M3 (the largest measure of the money supply) was $9.7 trillion, thus coins made up only about one one-thousandth of the total money supply and in fact, all tangible currency, in the form of both coins and Federal Reserves Notes (dollar bills), together made up only about 2.4 percent of M3, the other 97.6 percent of the money supply came into existence from loans made by commercial banks to other banks and to individual companies and to the public. The Fed created only roughly 3% of this total, private banks created roughly 97%, thus the vast majority of the world’s money supply is generated through the fractional reserve banking practice of loaning money that doesn’t actually exist and is only created electronically based on a certain small amount of reserves held by commercial banks – what this means essentially is that the world’s money supply is, in fact, the same (or 97.6% of it is the same, to be exact) as the total amount of debt in the world, this is why the inflation everyone complains about is actually necessary to keep the scheme going, to keep workers on the treadmill that powers their industrial empire, the bankers must create enough new debt money to cover the interest on their loans. Thus it is not an exaggeration to say that the currency/money supply is the federal debt and cannot exist without it.
The total of base money in circulation plus the money created by consumer borrowing is called M3, as the chart above shows, the M3 money supply peaked in 2009, then began an abrupt drop, the base money only represents approximately 14% of the total money supply ( in fact the slowdown in consumer borrowing has more than offset the increase in base money, thus, the overall money supply is declining.)
“Should government refrain from regulation (taxation), the worthlessness of the money becomes apparent and the fraud can no longer be concealed.” – John Maynard Keynes in ‘Consequences of Peace’.
Note below an interesting transcript from a Congressional banking hearing, held on February 17th 2000, between Congressman Ron Paul (Republican – Texas) and then Fed Chairman Alan Greenspan, Dr. Paul was enquiring as to the Fed’s expansionary policy in the lead up to the Y2K scare and Greenspan remarked in the difficulty of the Fed in ‘defining money’:
Dr. PAUL. My concern is what is going to happen when this bubble bursts? I think it will, unless you can reassure me. But the one specific question I have is will M3 shrink? Is that a goal of yours, to shrink M3, or is it only to withdraw some of that credit that you injected through the noncrisis of Y2K? Mr. GREENSPAN. Our problem is, we used M1 at one point as the proxy for money, and it turned out to be very difficult as an indicator of any financial state. We then went to M2 and had a similar problem. … The difficulty is in defining what part of our liquidity structure is truly money. … Our measures of money have been inadequate and as a consequence of that we … have downgraded the use of the monetary aggregates for monetary policy purposes.” Dr. PAUL. It is hard to manage something you can’t define. Mr. GREENSPAN. It is not possible to manage something you cannot define.
Thus Greenspan himself admitted that central bankers have no way of determining how much money to produce or when to offer it, almost inevitably, central banks print too much money and offer too much credit, leading to the business cycles that cause so much havoc in Western economies and throughout the world.
Hierarchy of the Fed
Officially the Fed is a two level system, twelve regional Federal Reserve Banks (the New York Fed is one of them) and the Board of Governors that runs them, however in reality it is both the Federal Reserve Board and the Federal Advisory Council which administers the Federal Reserve System as its head authority. Each of the twelve Federal Reserve Banks elects a member of the Federal Advisory Council, which meets with the Federal Reserve Board of Governors four times a year in Washington, in order to “advise” the Board on future monetary policy. In reality, the smaller banks of the twelve Federal Reserve districts exist only as satellites of the New York Fed who control the whole federal reserve system, and are completely subservient to it. Because the Federal Reserve Bank of New York sets the interest rates and directs open market operations (described later), thus controlling the daily supply and price of money throughout the United States, it is the stockholders of that bank who are the real directors of the entire system and they completely dominate the other eleven branches through stock ownership, control, influence, and having the only permanent voting seat on the Federal Open Market Committee, all open market bond transactions are handled by the Fed Bank of New York.
Board of Governors
The Board is a seven-member panel ‘appointed’ by the President and ‘approved’ by the Senate, it determines the interest rate for loans to commercial banks, selects the required reserve ratio which determines how much of customer deposits a bank must keep on hand (a factor that significantly affects a bank’s ability to create new credit), and also decides how much new currency Federal Reserve Banks may issue each year. The chairman, currently Ben Bernanke, is appointed for four-year terms and other Board of Governors members are given 14-year memberships (with no limit on renewals).
The political process of appointing the Board of Governors is a mere formality and is not a true democratic process in any sense of the word, as G. Edward Griffin once wrote: “the Board of Governors is politically appointed. This is true and it is supposed to make us feel safe in the thought that the President responds to the will of the people and that he selects only those who have the public interest at heart…. the President does not select these people from his own personal address book, nor does he ask the public to submit nominations. With few exceptions, he makes appointments from lists given to him by the staffs of banking committees of Congress and from private sources that have been influential in his election campaign. The most powerful of all these groups are the financial institutions ……..anyone with knowledge of how our current political system works will understand why the president makes exactly the appointments that the banks want him to make. All one has to do to see the accuracy of this appraisal is to examine the backgrounds and attitudes of the men who receive the appointments. While there is an occasional token individual who appears to come from the consumer sector of society, the majority are bankers deeply committed to the perpetuation of the system that sustains them.”
Federal Advisory Council
This is a panel of twelve representatives appointed by the board of directors of each Fed Bank, the Council meets at least four times each year with the members of the Board to give them their ‘advice’ and to discuss general economic conditions.
“The claim that the “advice” of the council members is not binding on the Governors or that it carries no weight is to claim that four times a year, twelve of the most influential bankers in the United States take time from their work to travel to Washington to meet with the Federal Reserve Board merely to drink coffee and exchange pleasantries” – Eustace Mullins
Representing the New York Federal Reserve district on the first Federal Advisory Council was J.P. Morgan, he was named chairman of the Executive Committee, thus, Paul Warburg and J.P. Morgan sat in conference at the meetings of the Federal Reserve Board during the first four years of its operation. In 1918 J.P. Morgan obligingly gave up his seat on the Federal Advisory Council, and for the next ten years, Paul Warburg continued to represent the Federal Reserve district of New York on the Council, he was vice president of the council 1922-25, and president 1926-27. Thus Warburg remained the dominant presence at Federal Reserve Board meetings throughout the 1920s.
FOMC Federal Open Market Committee
The FOMC has twelve members, consisting of the members of the Board, the president of the New York Fed, and four presidents from other regional Federal Reserve Banks. It formulates open market policy, which determines how much in government bonds the Fed banks may buy or sell – the major tool of monetary policy. The other members of the FOMC are comprised of the presidents of the twelve regional Federal Reserve banks, each is chosen by their respective boards of directors and approved by the Board of Governors, although most of the regional banks presidents are present at FOMC meetings, only five have a vote on Fed policy at any given time, the New York Federal Reserve Bank, through its direct and permanent representation on the FOMC, has more say on monetary policy than any other Federal Reserve Bank, the FOMC meets eight times a year to discuss and decide the direction of Fed monetary policy.
When the FOMC meets every other month, plus an additional meeting in December, it can make several decisions regarding monetary policy, it can decide to raise, lower or leave the Fed Funds interest rate unchanged. In addition it can set a bias of monetary policy towards inflation, recession or a neutral (or no) bias, the bias is important because it allows the Chairman of the Fed to act unilaterally in changing the Fed Funds rate between FOMC meetings. For example, in late 2000, the FOMC changed its viewpoint to a bias against an economic slowdown or a recession, this was a result of the weakening economy and the concern that the US might be heading for a recession, by setting the bias against a recession, then Fed Chairman Alan Greenspan was able to reduce the Fed Funds rate several times on his own initiative in 2001. In 2002, the FOMC changed the bias to neutral, when the bias is neutral, the Federal Reserve Chairman can no longer act on his own to change the Fed Funds rate.
Fed Funds Rate
The Fed funds rate is the interest rate the Fed targets with open market operations, this is a very short-term interest rate that depends on the level of excess reserves present in the vaults of banks. By engaging in an expansionary policy, the Fed is using open market operations to buy bonds from the asset portfolios of some banks, as these banks sell bonds to the Fed, their cash reserves increase, creating excess reserves and expanding the monetary base.
When the Fed lowers the Fed Funds Rate they lower the short term interest rate and also signal to the market that they expect lower long term interest rates to follow but, and this is a very important point regarding Fed monetary policy, while the Fed can directly control the Fed funds interest rate, it only has indirect control over longer-term interest rates and the key to attaining the Fed’s goal of changing the growth rate of GDP lies in long-term interest rates- changes in long-term interest rates create a response in business investment activity and consumer borrowing. How effective the Fed are in determining the direction of long-term interest rates can be seen in changes in the spread or gap between short-term and long-term rates. The historical gap between the 3-month Treasury bill rate and the long-term government Treasury bond is about 2%. The longer the maturity of the debt, the higher is the associated interest rate, if the Fed lowers short-term interest rates by 0.5% (1/2 a basis point), the Fed’s goal is to maintain a constant spread, in this case long-term rates will also fall by 0.5% and investment and consumption activity will increase.
Open Market Operations
The Fed’s most important and widely used monetary policy tool is open market operations. The main goals of open market operations is to manipulate the short term interest rate and the supply of base money in an economy. The reserve requirement, which necessitates that banks keep 10% of the value of existing deposits on reserve with the Fed, gives the Fed tremendous amounts of money with which to engage in financial transactions. Open market operations involve the buying and selling of government debt (Treasury Bills, Notes, and Bonds) by the Fed, the Fed makes these debt transactions with banks in order to alter total reserves in the banking system. The Federal Reserve, beginning with zero government bonds in 1913, had acquired about $400 million worth by 1921, and $2.4 billion by 1934, by the end of 1981 they had amassed no less than $140 billion of U.S. government securities; by the middle of 1992, the total had reached $280 billion, today, in 2013, the number goes into multiples of trillions and that number is growing faster every day. (due to ‘Quantitative Easing’)
Let us consider a specific example, assume the Fed wants to use open market operations to increase bank reserves, note that banks use a portion of customer deposits (liabilities) to buy assets in the form of federal government-issued debt, when a bank receives a deposit, it must keep a portion on reserve with the Fed (At the present time, the Fed’s official reserve requirement is 10%) and pay a deposit insurance premium to the FDIC (Federal Deposit Insurance Agency). To increase bank reserves, the Fed buys some of the government bonds from banks, first it directs its Open Market Agent in New York City to purchase say $1 billion of U.S. government bonds, to purchase those securities, the Fed writes out a check for $1 billion on itself, the Federal Reserve Bank of New York, it then transfers that check to a government bond dealer at an investment bank, say Goldman Sachs, in exchange for $1 billion of U.S. government bonds. Goldman Sachs goes to its commercial bank, say Chase Manhattan, deposits the check on the Fed, and in exchange increases its demand deposits at the Chase by $1 billion. The $1 billion is created with accounting entries, increasing the money supply by that sum, but this, says Murray N. Rothbard, is “only the beginning of the inflationary, counterfeiting process”. Chase Manhattan is delighted to get a check on the Fed, and rushes down to deposit it in its own checking account at the Fed, which now increases by $1 billion, but this checking account constitutes the “reserves” of the banks, which have now increased across the nation by $1 billion. With a 10% fractional reserve system in operation, this means that Chase Manhattan can create deposits based on these reserves, thus the bank will rapidly put the money to work earning interest by creating an additional $1 billion in loans, and as checks and reserves seep out to other banks, each one adds its inflationary mite, until the banking system as a whole has increased its demand deposits by $10 billion, thus in a brief period of time, about a couple of weeks, the entire banking system will have expanded credit and the money supply another $9 billion, ten times the original purchase of assets by the Fed.
As stated at the beginning of this article, ‘reserves’ are merely accounting entries at Federal Reserve Banks that allow commercial banks to make many times those sums in loans, there are no physical reserves of any kind, this is how ‘money’ is created, by “building up” deposits, this is done by making loans, you see, contrary to popular belief, loans become deposits rather than the reverse. And where did the Fed get the money initially to pay for the bonds? It created the money out of thin air, by simply writing out a check on itself. Central banks like the Fed have got to distribute credit money through commercial banks, because the alternative – simply distributing it to people – would reveal the scam for what it is. By filtering the ‘money-printed-from-nothing’ scheme through many banks in many guises, the process is rendered more complex, this is necessary for all Ponzi schemes, which is essentially what the Federal reserve system is, and like all Ponzi schemes it only really benefits the people with direct access to the central funding stream, of course another fact about Ponzi schemes is that they all have a finite life span.
If a bank with excess reserves cannot immediately find a long-term borrower, it can still earn interest by loaning the credit to another bank, this is done through the Fed Funds market, where banks borrow credit from each other for a short-term duration (sometimes only overnight or a few days), this is done when some banks may need to raise credit on a short-term basis if they have fallen below their reserve requirement and/or need to raise credit to make a loan to a corporate customer. Thus we can see the connection between the Fed open market operations and short-term interest rates, if the Fed is undertaking an expansionary policy (buying bonds), some banks will find themselves with an increased supply of excess reserves when they sell part of their government bond portfolio to the Fed. As the supply of excess reserves rises, banks will lower the interest rate they charge other banks to borrow short-term in the Fed funds market, as a result, the Fed funds interest rate decreases.
Since most money now exists in the form of electronic records rather than in the form of paper, open market operations are conducted simply by electronically increasing or decreasing (crediting or debiting) the amount of base money that a bank has in its reserve account at the Fed. Thus, the process does not literally require new currency, however, this ‘reserve’ will increase the Fed’s requirement to print currency when the member bank demands banknotes in exchange for a decrease in its electronic balance.
Interest Rates & Inflation
Under ‘inflation targeting’, open market operations target a specific short term interest rate in the debt markets, this target is changed periodically to achieve and maintain an inflation rate within a target range, other variants of monetary policy are also used often to target interest rates, however the global cartel that is the US Federal Reserve, the Bank of England and the European Central Bank, mainly use open market operations to control both short-term and long-term interest rates.
Interest rates react mostly to inflation expectations. If it is believed that inflation will be high, interest rates rise. Think of it this way, say inflation is 5 percent a year, in order to make money on a loan, a bank would have to at least charge more than 5 percent interest. Interest rates have the biggest effect on the bond market, if interest rates rise, the bond markets suffer, say you own a bond that is paying you a fixed rate of 8 percent today, and that this rate represents a 1.5 percent spread over Treasuries, an increase in rates of 1 percent means that this same bond purchased now (as opposed to when you purchased the bond) will now yield 9 percent and as the yield goes up, the price declines, so your bond loses value and you are only earning 8 percent when the rest of the market is earning 9 percent.
So the Fed uses open market operations to directly control the rate of fiat money/credit expansion which in turn directly controls the short term interest rate, they then use this short term rate in unison with the reserve ratio to control the long term interest rate as much as they can, controlling the long term interest rate is key to controlling inflation, which is the primary concern of the Federal Reserve system, controlling inflation allows them to expand the fiat money/credit supply at a slow but steady rate, an ever expanding fiat money/credit supply means an ever increasing return of profit for the owners of the world’s central banks.
See here a graph from 1980-2012 illustrating how an expansion in the national debt (ie credit money expansion) corresponds to a decrease in both the short term and long term interest rates (the yield on all bond rates are set against market interest rates to judge their value so, in this case, they are one and the same). Increasing the credit money supply lowers interest rates, decreasing it raises interest rates.
From 1913 [inception of the Federal Reserve] to 2001 the national debt grew to $6 trillion in 88 years, in the next three years it climbed to $7 trillion dollars, by the following year 2005 it had climbed sharply to over $8 trillion dollars, the acceleration of the US national debt is truly alarming.
“In a post on ‘Free Market Network News’, entitled ‘The Credit Delusion’, banking executive Christopher Mayer makes this point about how central banking encourages the creation of retail debt, as follows: ‘The purpose [of the central banking mechanism] … is to encourage debt, and indeed it has achieved the result. Debt as a percentage of disposable income, for example, is as high as it has ever been, over 100%. As recently as 1990, debt represented 80+% of disposable income. In 1982, it was in the 60% range. … At the heart of such a scheme — its sole logic — is that debt need not be repaid but postponed by increasing the debt of the debtor.’” Anthony Wiles – ‘High Alert’
The two decades from 1990 to 2010 has seen numerous instances of inflation crisis such as the Southeast Asian currency crises, volcanic hyperinflation in Zimbabwe, and spectacular currency crisis in Argentina, when at some points, Argentinean shopkeepers had to spontaneously raise their prices by 33 percent in the middle of the day because their suppliers gave them a call saying their prices had gone up.
During WWI, the Weimar Republic was taking their turn printing off bales of currency, however, because of the chaotic times, people were saving their currency. Since people were not spending their currency, no one could see the effects of inflation. Once the war ended and people began consuming again, the effects of unrestrained printing began to show, by the end of 1923, thirty-three printing plants in Germany were printing a total 500 quadrillion marks every single day, during these times, you could purchase a full city block in downtown Berlin for only 25oz of gold.
In fact, in the one hundred years between 1910 and 2010 at least thirty-three countries have experienced hyperinflation.
“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” – Thomas Jefferson in the debate over the Re-charter of the Bank Bill (1809)
Consequences of Fed Policies: Booms & Busts – Great Depression
The boom-bust cycle created by overprinting of money is also known as the business cycle and it is just as critical to understand the business cycle — a product of central banking inflation — as it is to understand the mechanism of central banking itself. The business cycle, as defined in the modern day, is a primarily central bank driven phenomenon. The central bank prints more money and injects more credit into the economy than is necessary, the volume of money leads to inflation which, in turn, stimulates a “boom.” As the economy overheats, products and services that are an unnecessary outcome of the artificial boom become commonplace, leading to a glut and, inevitably, to a collapse. During the boom, the central bank may artificially increase interest rates while also raising the amount of money available via credit and its printing plants, this gradually eases the economy (best case) into a “soft landing” — after which the cycle begins again. In a truly free and honest market, in which say, gold and silver would circulate alongside all fiat money (ie 100% backing the fiat currency), the business cycle would be radically reduced because gold and silver, dug out of the ground, would respond to market forces, too much gold or silver in the economy and prices would go down, closing mines, too little gold and silver and the prices would go up, stimulating mining production, thus the world would soon be back on an honest and truly free monetary system. Ludwig von Mises, and later his students F.A. Hayek and Murray Rothbard, developed or expanded upon the concepts of human action and the business cycle, i highly recommend reading their material.
In simplest terms, as we have seen, central banks — including the Federal Reserve — inflate by printing money and offering credit that is then expanded by other banks, the more money it “prints,” the cheaper money gets, and the less a government’s debt becomes. By cheapening money, the government deprives individual citizens of part of the value of that money, as the value is eroded, citizens become poorer, even if they don’t notice it right away, thus inflation makes those closest to the money printing facility the richest and those furthest away ( i.e. public) the poorest, being first in line to receive the benefits of fiat money, including credit power, is just as rewarding as printing the money itself.
Historically, the Fed have used their monetary policies to create a continuous cycle of credit expansion and contraction, a series of ‘booms and busts’ as people commonly call them, they sow the seeds of a recession or depression by artificially lowering interest rates, this ignites a false or unsustainable economic ‘boom period’, but since the lower interest rates are caused by the Feds expansion of the money supply and not an increase in savings by the public, businesses that have invested in long term capital projects eventually discover that there is not enough consumer demand to justify their investments, thus the ‘bust’ period is actually a necessary cure for the economic miscalculation. Government policies that bail out businesses that have made bad investment decisions, will only delay or prohibit economic recovery while encouraging more of the same behaviour in future, this is how short recessions can be turned into much longer ones or even depressions.
The Fed created its first boom-bust cycle very soon after opening for business, the beginnings of the Great Depression actually took place in 1914 when the Fed reduced interest rates from 6% to 4%, they further reduced it to 3% in 1916 and maintained it at that level until 1920. The reason for reducing interest rates was to provide an incentive for people to partake in the Liberty Loan scheme, the purpose of the Liberty Loan Drive was to soak up the increase in circulation of the medium of exchange brought about by the large amount of currency and credit put out during the war when laborers were paid high wages, and farmers received the highest prices for their produce they had ever known, these two groups accumulated millions of dollars in cash, which they traditionally put into small country banks, thus that money was effectively out of the hands of the Wall Street group which controlled the money and credit of the United States. The operations of the Federal Reserve Open Market Committee in 1917-18, while Paul Warburg was still chairman, show a tremendous increase in purchases of bankers’ and trade acceptances, there was also a great increase in the purchase of United States Government securities, in fact a large part of the stock market speculation in 1919, at the end of the War when the market was very unsettled, was financed with funds borrowed from Federal Reserve Banks with Government securities as collateral, thus the Fed were flooding the market with easy credit up until 1918, the true goal of the Fed was to break the small country banks and get back the money which had been paid out to the farmers during the war, in effect, to ruin them. Firstly, a Federal Farm Loan Board was set up which encouraged the farmers to invest their accrued money in land on long term loans, which the farmers were eager to do, additionally the Fed raised the interest rate to 7% on agricultural and livestock paper, a raise aimed solely at farmers and workers, then inflation was allowed to take its course in the US and Europe in 1919 and 1920, the false boom which was created from 1914 until 1918, turned into a bust with the depression of 1920 where GDP fell by 24% from 1920 to 1921 and the number of unemployed Americans more than doubled from 2.1 to 4.9 million. This bust period in 1920/1 is commonly referred to as the Agricultural Depression. Note here the comment from William Jennings Bryan in ‘Hearsts Magazine’ in November 1923:
“The Federal Reserve Bank that should have been the farmer’s greatest protection has become his greatest foe. The deflation of the farmer was a crime deliberately committed.”
After the Agricultural Depression of 1920-21, the Federal Reserve Board of Governors settled down again to eight years of providing rapid credit expansion, this culminated in the Great Depression of 1929-31. As the Fed ramped up and began testing its powers, its activities put the “roar” into the roaring twenties, they expanded the U.S. currency supply by more than 55% in a decade, resulting in a huge speculative bubble in stocks, with easy money readily available, speculation was inevitable, the Dow Jones Industrial Average tripled between 1925 and 1929, as the country indebted itself on the euphoric belief that stocks would rise forever. During the 1920s, banks were an integral part of the ‘roaring’ growth in financial markets, looking for ways to make greater profits, they began actively participating in the stock market. Banks would take in deposits and not only make loans to businesses and individuals, but would buy stocks of companies, furthermore, they would make loans that used stocks as collateral, thus with extensive involvement by the banking sector, the stock market soared during the 1920s.
Given the frenzy of stock market activity caused by the reckless investing of individuals, businesses, and banks, the stage was set for the devastating crash of 1929. After a decade of tremendous growth, stock prices plummeted in the fall of 1929 and on Black Tuesday, October 29, 1929, the optimism of the roaring 1920s came crashing down as stocks were sold in a mass panic. Meanwhile, using Open Market Operations, the Fed started selling U.S. securities to private banks, their goal was to increase short-term interest rates, the securities sales sucked up excess cash, leaving even less credit to lend, and contracted the money supply even further, ravaging America’s economy.
“The terrible depression that followed was a direct result of bungling by the Federal Reserve System…. We never would have had the Great Depression if there hadn’t been a Fed.” – Milton Friedman & Anna Jacobson Schwartz -“A Monetary History of the United States 1867-1960”
The overall situation in the fall and winter of 1929 was chaos and panic. News of bank failures caused depositors to withdraw their money from even well run banks, the run on banks caused the financial system to collapse and the economy soon followed, the United States economy went into the Great Depression, which would last until World War II. On December 11, 1930, the largest bank failure in the nations history took place when the Bank of the United States closed its doors in New York, and in September-October of 1931 the bank panic increased as over eight hundred banks were closed in two months, individuals soon started to hoard gold to protect themselves. During the depression, Congressman Louis T. McFadden was a very outspoken critic of the Federal Reserve, regarding the Great depression, he said:
“It was not accidental. It was a carefully contrived occurrence … The international bankers sought to bring about a condition of despair here so that they might emerge as rulers of us all.”
On May 23, 1933, on the House floor, Congressman McFadden brought impeachment charges against many of the Federal reserve board members, federal reserve agents of many states, comptroller of the currency, and several secretaries of the United States Treasury for high crimes and misdemeanors, including the theft of eighty billion dollars from the United States Government and with committing the same thefts in 1929, 1930, 1931, 1932 and 1933 and in the years previous to 1928, amounting to billions of dollars, these charges were remanded to the Judiciary committee for investigation, where they were effectively buried and until this day have never been answered. [See Congressional Record pp.4055-4058 May 23, 1933]. As Nobel Prize winning economist, Milton Freidman said,
“The Federal Reserve definitely caused the Great depression by contracting the amount of currency in circulation by one-third from 1929 to 1933. To think that the Crash of 1929 was an accident or the result of stupidity defies all logic. The international bankers who promoted the inflationary policies and pushed the propaganda which pumped up the stock market represented too many generations of accumulated expertise to have blundered into the Great Depression …It was the game of boom and bust, using economic crisis to consolidate political power at the top where it can be most easily controlled.”
Today, the actions of the Fed have led the US economy to near financial ruin, the crash of 2008 began when a dangerously inflated real estate bubble burst, the property bubble actually originated in the 1970s, with increasing social engineering and anti-poverty programs. In the wake of the dot-com crash of 2000, the Fed, then led by Alan Greenspan, pumped up the money supply and suppressed interest rates, resulting in cheap credit for home buyers, in the end, as adjustable mortgages ballooned to unsustainably high payments and unworthy creditors began defaulting, the real estate market crashed, sending home prices plunging 33 percent over the course of three years, homeowners watched their equity vanish overnight, soon they owed tens or hundreds of thousands of dollars more than their homes were worth.
Ever since the property bubble burst in 2008, the Fed have been pumping more and more fiat money/credit into the financial system, this is commonly referred to as ‘Quantitative Easing’, since it began its policy of QE in 2008 the Fed have essentially purchased over 80% of US debt, the Fed say they are doing this to save the ‘too big to fail’ banking institutions, however the fact is the Fed have no choice but to purchase Treasury bonds/debt to keep the financial system functioning, the bond dealers in the financial market, who usually buy and sell these bonds, are acutely aware of the threat of high future inflation so the Fed have to pick up the slack, so the credit keeps expanding. However, Bernanke is now printing so much money, the financial system will not be able to absorb it without consequences, inflation will destroy the bond market and money will flow out of all bond markets looking for a place to go to, as assets are overpriced in an artificial environment of low interest rates, the moment interest rates rise, asset prices will plunge. Smart money will move out of assets but they cannot park their money in bonds as they are going down, so it will have to park it somewhere, the only place left to go is precious metals and essential commodities.
Increasing Control of the Fed
Before the 1940s the Federal Reserve had one job—to maintain stable prices by not printing too much currency, but following the Great Depression, the Unemployment Act of 1946 saddled the Federal Reserve with a second job, even though it was already failing at its original mission, it was now responsible for employment levels also, the success of the Fed on the “stable price” front is highly debatable to say the least, between 1913, when the Federal Reserve Act was signed into law, and 1946, when the Unemployment Act gave the Fed its dual mandate, the dollar had already lost over half of its purchasing power, fast-forward to today, and the dollar is worth just about 3% of what the 1913 dollar was worth, but after every crisis, the Fed’s powers and areas of authority were inexplicably expanded, following the assault on the dollar and near-fatal inflation of the 1970s, Congress in 1980 passed the Monetary Control Act which again handed more power to the Fed and more recently, the Fed has helped to push through two major pieces of legislation expanding its power over not only the banking system, but the stock market, insurance and real estate industries as well, working very hard with the Clinton Administration they passed the Banking Modernization Act in 1999 which erased the Glass-Steagall Act. Furthermore this law expanded the functions of commercial banks to not only syndicate securities but to also sell both personal and commercial insurance as well as real estate, thus creating what is termed, “financial conglomerates.” When Congress passed the Federal Reserve Act in 1913, this private group of bankers only got control of the monetary system via the banking system, they did not have control over the insurance industry and stock markets, by passing the Banking Modernization Act 86 years later, they now had control over ALL of these areas worth trillions of dollars. That same year, Congress also passed the Gramm-Leach-Bliley Act with very little fanfare, former Treasury Secretary Robert Rubin, now a co-Chairman at Citigroup which is a financial conglomerate, praised this bill at the time as being necessary and critical, what it really did was amend key banking laws such as the Banking Act of 1933, the Bank Holding Company Act of 1956, the Federal Deposit Institutions Act, the Community Reinvestment Act of 1977 and the International Banking Act of 1978 to substitute the Federal Reserve as being responsible for the entire financial system instead of Congress.
Role of Investment & Commercial Banks
Firstly a brief explanation on the functions of both banks, Commercial banks have traditionally performed two main roles: taking in deposits and issuing commercial loans, making their profits from the interest charged on said loans. Investment banks are not allowed to take in deposits or make commercial loans, rather they raise money for their clients by overseeing stock issuance and sales. Although investment banks are usually defined as businesses which assist other business in raising money in the capital markets (by selling stocks or bonds), in fact most of the largest investment banks make the majority of their profit from trading activities.
If a company or government wants to raise money, it has two options: 1) borrow from a commercial bank or 2) issue stock or bonds in the capital markets. In order to take advantage of the capital markets, the company or govt needs an investment banker. The investment banker buys the company’s stocks or bonds and then tries to resell them to interested investors (like mutual funds, pension funds, or individual investors). The process is called underwriting securities. The investment bank gives the issuing company needed funds, and takes on the risk of owning the securities, the process is risky because the bank may not be able to sell the securities later and thus would lose a lot of money, the bank makes money on the later sale of these securities, they also provides services such as setting up deals between merger and acquisition partners.
Commercial banks are banks that deal directly with businesses and provide a wide variety of services for corporate clients, including accepting deposits, lending money, underwriting bonds and brokering financial products. One of the major services that commercial banks offer is commercial loans, including unsecured and secured loans as well as mortgages. According to the Federal Reserve, as of 2011 the largest commercial banks in the United States are J.P. Morgan Chase & Co., Bank of America and Citibank. A commercial bank does two things; hold deposits and make loans, they create money by lending out deposits to individuals seeking a loan for some designated purpose (for example, a car loan or a loan to start a small business), they also keeps deposits on hand for individuals wishing to use the money to make payments (like a checking account). The commercial bank makes profit by lending out to individuals and other entities and collecting payments from these borrowers for principal and interest, on most loans, commercial banks in the U.S. earn interest anywhere from 5 to 14 percent, thus commercial banks are what the vast majority of people think of when it comes to banking.
An investment house, or investment bank, works primarily for corporations and governments, and generally performs two different functions: 1) Mergers and acquisitions advisory and 2) Underwriting. On the mergers and acquisitions (M&A) advising side of corporate finance, bankers assist in negotiating and structuring a merger between two companies. If, for example, a company wants to buy another firm, then an investment bank will help finalize the purchase price, structure the deal, and generally ensure a smooth transaction, they also help bring prospective buyers together with sellers. They provide advisory services to large individual investors, but deal primarily with larger institutional customers such as pension and mutual funds. The underwriting function within corporate finance involves shepherding the process of raising capital for a company. In the investment banking world, capital can be raised by selling either stocks or bonds to investors, there are a wide range of strategies and financial instruments that investment companies use, offering investors different exposures to risks. Investment companies invest in equities (stocks), fixed-income (bonds), currencies, commodities and other assets. The profits and losses that an investment company makes are shared among its shareholders. U.S. investment banks are primarily in New York City, with Goldman Sachs, J.P. Morgan and Morgan Stanley the largest institutions. In essence, an investment bank acts as an intermediary, and matches sellers of stocks and bonds with buyers of stocks and bonds. Note, however, that companies use investment banks toward the same end as they use commercial banks. If a company needs capital, it may get a loan from a bank, or it may ask an investment bank to sell equity or debt (stocks or bonds).
The central difference between commercial banks and investment banks centers on their respective dealings with securities. Commercial banks offer a wide variety of services, but they do not deal with securities (be it marketing, selling, brokering, underwriting or otherwise). Investment banks, on the other hand, make securities their primary area of business. The clients of investment and commercial banks differ as well, with commercial banks offering their services exclusively to businesses and investment banks offering different services to corporate clients, governments and consumers. After Glass-Steagall was effectively repealed in 1999 commercial banks and investment banks were once again given the leeway to combine under one roof and pure investment banks enjoyed greater relief from government regulations, in one notable case, the federal Securities and Exchange Commission (SEC) raised the debt limit for investment banks in 2004, which allowed Wall Street’s largest pure investment banks, such as Merrill Lynch, Lehman Brothers, Bear Stearns and Goldman Sachs, to invest more freely with borrowed money – an option largely denied to commercial banks, who were forced to maintain higher levels of cash and securities reserves to back up their loans and investments. The playing field shifted again in 2008, when a widespread financial crisis forced all of the largest surviving Wall Street firms to convert themselves into bank holding companies in order to gain eligibility for federal aid, the move transferred the firms from the investment-oriented regulatory oversight of the Securities and Exchange Commission to the commercial banking-oriented regulation of the Federal Reserve, thus the Fed was now in direct control of investment banking also.
Role of Government
It is not the Fed itself that is getting rich off U.S. taxpayers, although the Fed does make money, most of its profit is returned to the U.S. Treasury, and it is limited by law to a 6% annual dividend. The true damage caused by the Fed lies in its function of continually expanding the U.S. national debt in its desperate mission to stave off an economic contraction, or deflation. As the national debt balloons ever larger, the world’s largest financial institutions are raking in trillions in interest, according to the U.S. Treasury Department Website, the United States paid $454 billion in interest charges alone in the fiscal year 2011. The Fed itself reports that 95 percent of its profits are now returned to the U.S. Treasury, but a review of its balance sheet, which is available on the internet, shows that it reports as profits only the interest received from the federal securities it holds as reserves, no mention is made of the windfall afforded to banks who use these securities as ‘reserves’ that get multiplied many times over in the form of loans. To keep the economic treadmill turning, not only must the money supply continually inflate but the federal debt must continually expand. The fact is that the money supply is the federal debt and cannot exist without it, in order to keep money in the system, some major player has to incur substantial debt that never gets paid back, this role is played by the federal government. The government sells bonds to pay for things for which the government does not have the political wisdom or will to raise taxes to pay. But about 10% of the bonds are purchased with money the central bank creates out of nothing, the government then spends this new money. Once deposited, private banks use these new deposits to create ten times as much in new fractional reserve loans, this provides the economy with the additional money needed to purchase the other 90% of the new bonds, without drying up capital markets and forcing up interest rates. By borrowing the money (i.e. selling new bonds), the government spreads the inflationary effects out over the term of the bonds, thus there is little to no immediate inflation. Thus one can clearly see that the government does not work on behalf of the people, which is the common perception, but they, in fact, work for the banking corporations, for example, the Secretary of the Treasury in the US is not a government employee. The appointment of a Secretary of the Treasury is just that, an appointment to a position which is NOT a cabinet position in any administration. The S.O.T. is the governor appointed to the International Monetary Fund (IMF), he is not an officer of the United States, he is not a cabinet member and does not represent the interests of the United States. His position is as liaison between the federal government and the IMF, his obligation is to the IMF, not to the United States. The Secretary of the Treasury is not sworn into office as cabinet members are, and take no oaths to the United States.
The Myth of Government Job Creation
Government spending cannot create jobs, it can only destroy private sector jobs in order to create government jobs. The government debt, which exists because of inflationary money creation by the Fed, is in part, brought about to finance government job creation , but it depresses the private sector and destroys job creation there in order to finance public sector jobs, it is robbing Peter to pay Paul. Governemnt spending has never reduced unemployment overall, quite the contrary – it always increases unemployment because it crowds out so much private sector job creation due to public debt obligations.
Despite all the New deal spending during the 1930s, including employment of some 10 million people in government jobs, official unemployment was 15.7% in 1940 on the eve of WW2, that’s 5 times the 2.9% rate in 1929 at start of the Great Depression, there were about 5.5 million unemployed in America in 1940, by 1943 over 8 million had been drafted into military with 2 million more conscripted in next 2 years, thus it was the draft, not the stimulus of war, that ended unemployment during war years.
Eustace Mullins ‘Secrets of the Federal Reserve’
Ellen Brown ‘Web of Debt’
G. Edward Griffin ‘The Creature from Jekyll Island’
E.C. Knuth ‘Empire of the City’
Anthony Wile ‘High Alert’
Murray N. Rothbard ‘The Case Against the Fed’
Murray N. Rothbard ‘A History of Money and Banking in the United States: The Colonial Era to World War II’
Murray N. Rothbard ‘The Origins of the Federal Reserve’
Murray N. Rothbard ‘America’s Great Depression’
Henry Hazlitt ‘From Bretton Woods to World Inflation: A Study of Causes and Consequences’
Bill Still – Money Masters Documentary
Eustace Mullins – Secrets of the Fed